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Bonuses: verbal announcement of bonus pool was binding

The English High Court has held that an oral promise to create a minimum bonus pool of EUR 400 million was binding on an employer, even though it did not explain how individual awards would be allocated. The High Court also concluded that the employer should not have introduced a clause into individual bonus letters which purported to allow reductions based on changes to its results.

Take away points:

The decision highlights the potential consequences of making promises in relation to bonuses, even in fairly general terms and also the importance of making sure that bonus communications are clear, unambiguous and do not unduly fetter the employer’s discretion.

It is helpful that the High Court confirmed that employees will find it difficult to show that they relied on a statement by their employer simply by remaining in employment, where there are other possible explanations for them doing so.

The suggestion that the unilateral attempt to introduce the material adverse change clause was a breach of the duty of trust and confidence, although not binding on future courts, would mean that employees could have resigned and claimed constructive dismissal in response to the clause being introduced. Employees who did so would not have been bound by any restrictive covenants in their contracts.

Background

Dresdner faced high levels of staff attrition following an announcement that it intended to sell its investment banking business. Under pressure from the Financial Services Authority (“FSA”) to address the staff turnover, it chose to propose a minimum bonus pool of EUR 400 million, which was announced by the CEO of the investment bank at a “Town Hall” meeting in August 2008. The announcement was later reinforced by statements from HR.

Between August and December 2008, Lehman Brothers went into liquidation and the performance of Dresdner’s investment bank deteriorated. As a result, employees’ annual bonus letters, sent in December 2008, included a material adverse change clause (“MAC clause”) that sought to reserve a right to reduce bonus payments if “additional material deviations” were identified in Dresdner’s accounts.

In January 2009 Commerzbank acquired Dresdner’s investment banking business. Dresdner exercised the MAC clause and reduced bonuses by 90%. Over a hundred employees claimed that the “Town Hall” announcement was contractually binding on Dresdner, which had therefore breached their contracts of employment by introducing the MAC clause and reducing their bonuses.

In 2010, Dresdner and Commerzbank applied for summary judgment on the basis that the claims had no realistic prospect of success. The High Court held that the argument that the announcement of the minimum bonus pool created enforceable legal rights had no reasonable prospect of success but allowed the argument that the individual bonus letters created such a right to proceed to a hearing. On appeal, the Court of Appeal overturned the High Court’s decision on the announcement of the minimum bonus pool and allowed both arguments to proceed to a full hearing.

High Court

The High Court has now upheld the employees’ claims. It held that the CEO’s announcement amounted to a contractual commitment. Although it did not need to decide the point, it also held that the introduction of the MAC clause was a breach of the implied term of trust and confidence.

“Town Hall” announcement

The High Court considered that:

the announcement was clear and unequivocal and committed Dresdner to paying a “guaranteed” minimum level of bonuses “no matter what” (i.e. regardless of Dresdner’s performance);

Dresdner must have intended the announcement to create a legal obligation, otherwise it would not have achieved the desired effect of retaining staff or satisfying the FSA;

the announcement, in conjunction with a subsequent email from the Group Head of HR, amounted to a unilateral variation to employees’ contracts (in accordance with the relevant provision of Dresdner’s employee handbook); and

there was consideration for the promise, in terms of the substantial staff retention benefit.

The High Court stated that, had the announcement merely constituted an offer to change terms, not a unilateral variation, it would have found that Dresdner had impliedly waived the need for acceptance. However, it also held that if there was no such implied waiver, it would have found that acceptance could not be inferred simply because the employees had remained in employment because it was not satisfied that the employees’ continued employment was only referable to the announcement of the bonus pool.

MAC clause

Dresdner had conceded that if the announcement amounted to a binding commitment it was not entitled to introduce the MAC clause. Therefore it was not strictly necessary for the High Court to consider the MAC clause. Nevertheless the High Court gave its view on the matter. It found that the clause had been introduced as a result of pressure from Commerzbank, and to enable Dresdner to go back on its earlier promise and that this amounted to a breach of trust and confidence.

The High Court also found that, even if the MAC clause had been enforceable, Dresdner had not complied with its terms in reducing the bonuses. Among other discrepancies, the bonus review was not carried out by the CEO in January 2009, Dresdner had not established that the reduction to the bonus pool was “necessary” and Dresdner had used the wrong forecast when comparing financial results. This meant that, even if the clause had been lawfully introduced, Dresdner would not have been entitled to reduce the bonuses.